physician home purchase walkthrough step by step how to buy a physician home

What You Don’t Know About Home Ownership

physician home purchase walk through step by step how to buy a physician home - process of buying a new home

Mindy Jensen, Community Manager for BiggerPockets.com, a popular social network for the real estate investing community, is all about helping potential homeowners. Mindy is an expert in real estate and was happy to share some of her insight into the process of buying a new home. Together, we will take you on the journey step-by-step, offering valuable tips along the way so you can enter the market with confidence and homebuyer poise.

At Physician Wealth, I deal with a lot questions regarding the home buying process. I’m asked questions like “How much can I afford?” and “How do I select an agent?” This episode shares the best insight from Mindy to address these questions for you.

Mindy is on BiggerPockets’ YouTube and on Twitter. Give her a shout to let her know you heard this episode!

If You Want to Know The Process of Buying a New Home, You’re In the Right Place

Contents

Recorded in a live setting, I speak with Mindy on the floor of Podcast Movement to talk about real estate. Our conversation will answer questions surrounding the home buying process, so sit tight and get ready for a great conversation.

What you will learn:

  • Things to consider when you decide you are ready to buy.
  • How to choose the right area to live in.
  • How to find a good agent you can trust.
  • Physician loans and what banks will not tell you.
  • What does PMI stand for and why does it matter.
  • Why emergency funds are important.
  • Difference between prequalified and preapproved.
  • The purpose of Title Insurance and how to review it.
  • How to avoid being scammed out of your deposit!
  • Plus some valuable info on the home inspection process and why you should be there.

Don’t Forget to Add to Your Toolbox, Get Involved and Help. Here’s how:

If you enjoyed this episode, I’m sure you would enjoy reading this: 4 Common Mistakes Physicians Make When Purchasing Their First Home

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Full Transcript: What You Don’t Know About Home Ownership

Ryan     

Hello and welcome to the Financial Residency podcast. I’m your host Ryan Inman. Before we get started, I want to say thank you so much for tuning in today. I know there are a ton of podcasts out there, and I really appreciate and honored that you guys are here listening to me. Before today’s show, I want to make sure to announce this important disclaimer. I am a family financial planner and a fiduciary for my clients, but let’s be honest. I don’t know you or anything about you. This show is for educational purposes only and shouldn’t be taken as legal or financial advice.

Please consult your attorney’s CPA or your fee-only financial planner before you take any action or make any important financial decisions. Today, we’re going to be talking to Mindy Jensen from BiggerPockets. If you don’t know what BiggerPockets is, man, are you in for a treat. BiggerPockets is home to the largest community of real estate investors on the internet. They have over 850,000 members. I think they just passed over three million posts on their forum. They’re adding about 750 members a day. Some ridiculous numbers there.

Image of a house with a magnifying glass zooming in

This is the step-by-step process on how to buy your first home.

They have dozens of how-to guides. I believe they’re in the hundreds of podcast episodes, and they have some amazing books that they’ve published all around real estate investing. I own I think every single book, and have definitely read every single book, and they are amazing. So if you’re interested in real estate, I’ll definitely be linking them in the show notes, but if you’re interested in real estate and learning more about real estate regardless of what level you’re at, bigger to advance, they have some great content, and you should be checking out biggerpockets.com.

Today’s episode is recorded in the live setting, just like the other three episodes in the podcast launch week. Today, we’re talking with Mindy on the floor of Podcast Movement, which is a conference all for podcasters. We’re at the FinCon booth. This won’t be the norm, but I think Mindy and I have a great conversation. You’re going to learn all about the steps to take to buy your first property. Whether it’s a rental property or your first home, we walk through the entire process from finding an agent, what documents you should have, how to look for homes, what’s important to look for in a home, and all the way to, basically, you own the home. So, before we jump into the interview …

Here is this week’s digestible tip.

Make sure you match your 401(k) or your 403(b).

Ryan

When you’re looking at your retirement savings and your company offers a match in your 401(k) or your 403(b), make sure you put up into that match. That is just free money. There’s no guarantees in life, but your company’s literally telling you, “If you put money here, we will double it.” Do it. Easy money. Once you’ve put up to the match, then look at funding your traditional IRA or Roth IRA, depending on if you’re excluded from contributing to a Rother. Not directly based on your income level. But either one, you’re going to put in the $5500 for there and for the year. And then go back and start maxing out your 401(k), but do not leave free money on the table.

Welcome to the Financial Residency podcast. Tonight, I’m sitting on the Podcast Movement floor at the FinCon booth with Mindy. Mindy, can you introduce yourself to the listeners?

Mindy                  

My name Mindy Jensen and I’m the Community Manager for biggerpockets.com.

[bctt tweet=”When you’re ready to buy a home, start with knowing how long you want to live in an area.” username=”physicianwealth”]

Ryan

We’re going to talk to you today about real estate and the process of buying your first home. A lot of clients and prospects that I deal with over at Physician Wealth always have questions around the process and how much home they can afford and how to find an agent and all these great things. So I want to just jump right in and talk about the process of buying your first home. Where should someone start when they decide, “Hey, we’re ready to buy a home”?

Mindy

The first thing you should really think about is how long do you want to live in that area? If you’re going to be there only a short time, it may not be worth it to buy a house. Really, think about, “Do I want to live here for an extended period of time?” After that, you need to know how much mortgage you can afford comfortably. If you’re coming out of medical school, you most likely have student loan debt and you’re going to need to pay that back, or you’re going to at least need to pay the minimums. We had talked about this earlier. You pay the minimums and you can get a student loan forgiveness for, I’m assuming, being a doctor in a certain area.

Physician loans and banks are notorious for giving you more money than you need.

Ryan

Yeah, and working for a 501(c)(3) and everything. We deal with that in one of the earlier episodes that I’ll link to. When they’re looking to buy a house, there’s some other perks. There’s physician loans and banks are notorious for giving you way more than you should be using and should be purchasing. We’ll kind of talk into that. What really should they kind of be looking for with school districts and that kind of stuff?

Mindy

Sure. So, after you’ve determined how much you can comfortably afford, based on all of your other bills and all of everything, you still want to have your emergency fund. You want to be funding that. I’m sure you’re talking about that in the earlier episodes. You want to look at where you want to live. There are definitely going to be neighborhoods that you like and definitely going to be neighborhoods you don’t like. So, as you’re driving through town, I’m assuming you’re already living there. If you’re moving to a new location, you should absolutely rent for the six months or year until you really know the area, because the last thing you want to do is buy a house, and then have to sell it when you discover that you hate the neighborhood. I know this from personal experience.

I bought a house. And two weeks after we close on the house, my husband and I looked at each other and said, “Do you want to move back to where we just came from?” because we hated the neighborhood so much. That wasn’t really something we had paid attention to. We were moving there from out of state. Know your neighborhood. Do you have kids? If you have kids, you should be looking at the school districts. Do you not have kids? You should still be looking at the school districts because a house in a school district is a lot easier to sell than a house that isn’t in a good school district.

Do your research on the area, including school districts.

It’s not impossible to sell a house in a bad school district or in a not-so-good school district. But if you got two right next to each other and one is clearly better, that’s the better place to live in, and that’s the better place to have your house because people will pay a premium for that should you decide to sell. I am a nomad. I have never lived in the same house for more than five years in my whole life. I always have an eye on the resale. Even if you’re not going to sell it for 25 years, it still is nice to get into the school district.

A good school district can go bad, but it’s very difficult for a bad school district to suddenly become great.

Ryan

Yeah, and that makes total sense. Keeping with the theme of a school district, what do you think about buying the nicest home in a somewhat worse neighborhood of that district or buying the worst home in the nicest side of … or in that school district?

Mindy

I would always recommend the latter, because let’s say all the houses in the neighborhood are selling for $400,000 and there’s this one that’s selling for $300,000. People who are looking to pay $300,000 are looking in the $300,000 neighborhood, and then they find this one in the $400,000 neighborhood, and they say, “Ooh. I would live there.” If you flip it over, if you have a $400,000 house in a $300,000 neighborhood, people who are looking for $400,000 houses are looking in $400,000 neighborhoods. So, that’s going to be more difficult to sell.

You make your money on the purchase.

Image of money being examined by a magnifying glass

Again, I’m always looking at the resell of it. So, that’s going to be more difficult to sell if for some reason you have to sell quickly. Nobody wants to put their house on the market and then hope it takes six months to sell. That’s never a fun sell.

Ryan

That’s never a good thing. I know you guys over at BiggerPockets always say, “You make your money on the purchase.”

Mindy

You absolutely do.

Ryan

So when you’re doing this and you’re looking at the worst house in the best neighborhood, it might mean that some money needs to actually be put into it. But that whole rehab piece of it will actually build equity, potentially multiples of equity, and make them successfully, actually have a nice home. So when someone says, “Okay. I’m ready. I’ve targeted the school district, and I’m ready to really start looking in this neighborhood,” how do they find an agent?

Mindy

You want to ask for recommendations. I have a sister who went and sold her house. She was driving past … It was kind of on a whim. She drove past the sign. She called the woman up, and she said, “I want you to sell my house.” Well of course the woman’s going to say, “Yes.”

You want to ask for recommendations.

Ryan

Thank you.

Mindy

She was not good with first-time sellers. My sister was a first-time seller. My sister also used her to buy her new place and she wasn’t very good with first-time buyers. My sister had lived in her house for long enough, but all the rules have changed and she really didn’t know what she was doing. Nevermind this. She has a sister who’s a licensed real estate agent in the state of Colorado and works at a real estate investing website where we teach people how to invest in real estate and how to buy and sell.

Ryan

Next time maybe?

Mindy

Yes, yes. Next time maybe.

Ryan

Perfect.

Mindy

So you want to ask your friends. “Hey, who did you use as your real estate agent? Do you like them? Would you recommend them? Would you use them again?” When they say, “Yes,” you want to ask a few more, “Why? Why is it that you like them? What is it that they did?” Or if they don’t like them, you want to note that too, because, you know, I had a roofer who was terrible. My neighbor down the street asked me, “Hey. Who’s your roofer? Would you recommend him?” I said, “Absolutely not and here’s his name. Don’t you dare use him. He’s not good.” So, not only getting a good recommendation but also knowing who to avoid is important.

You definitely want to interview agents while in the process of buying a new home.

But on the flip side of that sign story, if you’re driving through a neighborhood, and you notice the same name or the same couple of names over and over and over, they’re familiar with that neighborhood. So they’re worth calling and talking to a little bit more, but you definitely want to interview agents. And don’t just settle on the first person you talk to. Wait until you find somebody who communicates in the manner you want to communicate with, who is nice, who is understands what you’re looking for, and who isn’t going to push you into just buying anything so they get paid.

Real estate agents get paid on commission, meaning they don’t get paid unless you buy a house. So you don’t want somebody who’s just pushing you towards anything. You want somebody that’ll help you find the house that best fits your needs.

Ryan

That makes sense. Can you go a little bit more into how actual agents get paid? because I think that’s important to know from a financial aspect. If you were going to sign on with an agent and they’re doing this “for free,” right? You’re not actually paying them if you’re buying the house. The seller is.

Mindy

Correct.

Ryan

So, can you just kind of talk a little bit about from a buyer’s perspective, like what they need to look out for?

From the buyer’s perspective, a real estate agent gets paid on commission.

Image of a model home in hands of a real estate agent

Mindy       

Real estate agent gets paid on commission, meaning they get a portion of the purchase price, which varies by state and varies by location. It hovers around 5% or 6% is what the seller pays to have their house sold. That 5% or 6% typically gets split in half. So, 2.5% to 3% to each side of the sale, so the buyer’s agent and the seller’s agent will split that money. Let’s say for the sake of math, we have $100,00 house and the selling agent is getting 5%. So, 2.5% for each of them, so that’s $2500 that your buyer’s agent will get for showing you around, walking you through the purchase steps, and getting you to the closing table so that you can sign the contract and then you own your new house.

There’s this misconception of real estate agents. “All they ever do is show you houses.” Well, there’s a lot more to it than that. There’s the home inspection and the appraisal and the mortgage and all these other steps that you may not see. There’s a lot of dates and deadlines that need to be met.

Ryan

I think that’s good to know from a seller’s standpoint and from a buyer’s standpoint, that really, as a buyer, the seller is the one that’s paying the commissions. Is there any other type of thing that an agent can earn outside of that normal percentage? Or is it just the percentage is it?

Mindy

It’s actually a violation of law to have the real estate agent receive money from anybody other than their broker. When you have a contract with an agent, you don’t actually have a contract with the agent; you have a contract with their employing broker. So, that broker pays your agent. You can’t give your broker money. There’s not really any way for them to…

Ryan

To make anything else. Yeah, I was trying to get to the point that basically that they’re licensed under a broker and that the money actually flows through the broker to the agent and that’s how they get paid.

There’s definitely an incentive for agents to help you sell your house.

Mindy

Right. There is something called the Broker Price Opinion or BPO, where you ask a broker, “Can you tell me what you think this house would be worth?” That’s typically on the sell side. But even that is … What is it? Like $35 or $50 for them to write that up?

Ryan

I know it’s not much.

Mindy

It’s almost nothing.

Ryan

Whereas these commissions that we’re talking about, depending on the purchase price, can be tens of thousands of dollars.

Mindy

So it’s like $2500, $3000 per $100,000. If you’re buying a $500,000 house, there’s $15,000 right there, and that’s just your half.

Ryan

For each side.

Mindy

Yeah, that’s the agent’s half. So, yeah, it can be significant, and there is definitely an incentive for them to help you buy a house. You want to make sure that they are helping you find your next home. Not just buy any house.

A good agent will ask you what you need.

Ryan

Exactly. So you’re going to go through, and you’re going to say, “These are my wants, my wishes and my needs,” right? And that’s a lot of what I actually do in planning. We look at your goals, and you say, “These are my needs,” right? And then, “This is what I would like and then this is my dream.” A good agent will tell you, “Okay, what do you absolutely need?” “Well, I need a three-bedroom house or I need a big kitchen,” or whatever that might be. A need to entertain. And then, “What would you like?” “Oh I’d like a three-car garage,” and then you tell them your price. Like, “This is what I can afford.” Not what the bank tells you, right?

Mindy

No, you don’t want what the bank tells you. You want what you are comfortable with. What you can afford easily. It’s, “What is the most house I need?” There is this perception with physicians that they live in a big house because they’re rich. But you don’t have to live in a big house. If you would rather live in a small house or if a smaller house would fit your needs, why not live there?

Ryan

Absolutely. So, it’s all about getting into the goals and what you really want. It’s not driving that Mercedes if that isn’t important to you. If you just view a car as transportation to get to and from work, you don’t need a $100,000 Mercedes or Porsche. You can be driving a nice Toyota for $20,000. If a home is more important to you, then you might be spending a little bit more on a home, but it still doesn’t mean what the bank is telling you is what you can afford. You need to do that math.

Student loan payments aren’t considered in bank loans.

Mindy

Right. You had an interesting story about how the bank will tell you how much you can afford. As a physician, they don’t take into account the student loan payments?

Ryan

No, they don’t. If you’re going for a physician, it’s like a conventional loan, which is 20% down. Let’s say you’re going for a 30-year mortgage, but the bank will say, “Hey, because you’re a physician, as long as you’ve got a signed contract and we can verify you’re a physician — looking at paychecks or whatever it is — it doesn’t matter if your student debt was $10,000 or $500,000. We’re going to exclude that from your debt-to-income ratio and we’re going to allow you to go based on what your stated income is,” or they’ll verify it, but basically what your income is, as a doctor, there’s no PMI, and you can put as little as 5% down. So I threw out some jargon there. We should probably clarify what PMI is.

Mindy

Yeah, I was just going to say. PMI is private mortgage insurance. When a bank gives you a loan, they want to make sure they’re going to get paid back. If you don’t have 20% down for most types of loans, for a conventional, for an FHA, there’s a couple of other types of loans that don’t apply here. If you don’t have 20% down, they will charge you an insurance premium, and then they go out and get insurance on your loan to make sure that if you stop paying, they still get paid.

Ryan

They always look out for themselves.

Mindy

They always look out for themselves.

Ryan

Absolutely.

The VA loan is a great perk for former veterans.

Mindy

There’s a couple of loans. The VA loan comes with a 0% … as low as 0% down and also has no Pmi because the government is guaranteeing that it’ll get paid. So that’s a nice little perk for a former vet. I don’t know if you have any physician, former vets that are listening.

Ryan

There could be.

Mindy

They have doctors in the army too.

Ryan

Absolutely.

Mindy

That might be a nice way to combine those. What other jargon? What did you throw out?

Ryan

And I threw out a debt-to-income ratio.

Mindy

Oh, debt-to-income ratio. This is how much debt you have versus how much income you have. This is really important because you said that they don’t include your student loans, but that doesn’t mean you don’t have to pay your student loans.

Ryan

Absolutely.

Mindy

You’re getting this student loan forgiveness. You still have to make the minimum payments for … you said four years yesterday. I don’t know if that’s industry standard or if that was specific to one person or just in general.

You still have to make minimum payments even on a loan forgiveness program.

Ryan

That was just specific to one person. But essentially, even if it’s private, it doesn’t have to be federal. It doesn’t have to be in the loan forgiveness program. Any student debt, they will exclude inside of a physician mortgage or a doctor loan. It’s got a couple names. Of course everything in finance has several names. It means the same thing. Mentally confused, but that’s exactly what it is.

Mindy

Yeah, so let’s clarify that a little bit more. Let’s say you are bringing in $10,000 a month and your student loan bill is $4,000 a month. You still have to pay that $4,000 even though the bank looks at it as you make $10,000. Well, if you’re paying $4,000 in student loans, you only have $6,000 left so you can’t go get a $10,000 a month mortgage payment, which sounds ridiculous. That’s like a billion dollar loan.

Ryan

It happens though.

Image of two home illustrations which "buy" or "rent" indicated on it.

Mindy

Yeah, but you can’t do that because you won’t have any money left over to pay anything else or fund your emergency. The student loans don’t go away just because the banks don’t include them.

Ryan

Absolutely, and it’s one of those things that you got to look at. How many dollars come in, and how many dollars go out, and what is the task of every dollar coming in? So if you’ve got $10,000 coming in on your example, and let’s say that you have no other debt other than student loan debt, the bank is going to look at you as you have $10,000 to spend, but we all know that you have $6,000 in our example. So don’t go out and spend $4,000 on a mortgage payment or $5,000. Even if you’re in a high-cost living area, you might have to live in a cheaper area, a smaller house. Might be a starter home. Might be a significantly smaller starter home. Don’t overspend because the bank says you can.

Mindy

Absolutely. Oh put an exclamation point behind that. Don’t overspend just because the bank says it’s okay. The bank is not going to be the one that comes and helps you pay your bills when you can’t.

Banks aren’t really your friends.

Ryan

Absolutely. They’re not your friend even though they have a nice smile and want to sell you some stuff, but they aren’t your friend. The person has found a home. They found a realtor. They’ve identified the area. So now let’s say that they have decided to write an offer. What does that kind of look like, writing an offer? And kind of what would take place between the offer and the actual close?

Mindy

You found your agent. Now you need to start looking at houses. So your agent will set you up with email listings. They’ll start off with everything you want. You need three bedrooms, but you would you like a three-car garage. So, they’ll see, “Are there any bedrooms with a three-car garage in this price range? Oh here comes six back. Great. Here are six listings. Do you like any of them?” You click through the pictures. You read the description, and you say, “Hey. This one would look great,” or, “I like all six of them,” or, “I hate all of them.”

Your agent will tweak your listings. We finally figure out how many listings you’re getting. We figure out exactly what we’re looking for and you start going through the listings. You tell your agent, “I want to see these nine or these six or whatever.” They take you through the property. They walk you around. You need to look through the property. If you like the property, walk through it again and look for things you hate. “Oh it doesn’t have a bathroom on the first floor.”

Ryan

That’s great advice.

Mindy

First you want to like the house, because if you walk in and you’re like, “Wow, I hate this house,” you need to look for anything else to hate. Close the door and go to the next house. If you like the house, make sure you really like the house, and you just don’t think the paint color is pretty, or you like the kitchen but everything else about it is awful. See a house that you really like. Walk outside. Walk back in again and look for things you hate. “Oh this office is too close to the bathroom,” or, “The baby’s bedroom would be too far away from my bedroom or whatever it is.”

There is a buyer for every house. Make sure you love yours.

If you can’t live with it before you buy it, you’re not going to be able to live with it after you buy it. You’re going to hate it and you’re going to want to sell it. There’s a buyer for every house, but some houses are really weird. So you found a property. You want to make an offer on it. You get together with your agent. Most agents use an online, document-signing called DocuSign or CTMe or there’s a couple of other ones. But those are the two big ones. You tell your agent how much you want to make an offer for. If you’re not quite sure how much you should make an offer for, you can ask your agent to run the comps or run the comparable properties, which is a list of properties that have sold recently, that are similar to the property in the same general area.

So you want to make sure they’re in the same school district, especially if there’s differences between school districts. You want to make sure that they’ve sold recently. It doesn’t matter what it sold for a year ago. It matters what it sold for three weeks ago or even a month ago, three months ago. If you’re in a really hot market, it’s three months. If you’re in like more of a lukewarm market, you can go back six months. If you’re in a cold market, you could go back as far as a year, but sometimes you have to go back as far as a year because there isn’t anything to look at. So you have your agent run the comps.

If all three-bedroom, two bathhouses, with a three-car garage in this area are going for $400,000, it isn’t a good idea to make an offer for $200,000. Most likely it’s not going to get accepted. But does that mean you have to offer 400? Maybe you could offer 395 or 375 or maybe the other one’s all had brand new everything and this one has old carpet and kind of dingy paint or whatever. You want to look at properties that are in similar condition to the one you’re buying or make adjustments because they’re in better or worse condition than the one you’re buying. You decide on a price, with your agent, through your agent’s guidance.

You write the offer up. “Here’s the price I’m offering. Here’s the terms that I think I’m going to get.” Presumably, you have spoken to a mortgage lender, a mortgage broker, a bank, and you have gotten a preapproval for the highest amount of money that the bank is willing to lend you.

[bctt tweet=”Know the differences between pre-qualified and preapproved mortgage loans before you begin the home buying process.” username=”physicianwealth”]

Ryan

So we’re not talking about pre-qualifications where they just kind of glance over, and say, “Oh yeah. You’re prequalified for this.” You want to get something that says, “Preapproval,” where the bank has actually done a more not complete in depth but more in depth review your financials, and said, “We actually know you should be able to qualify for a $300,000 loan,” or whatever it is.

Mindy

Correct. So the prequalification, like you said, is just a quick glance. “Oh look. They say they make $100,000 a year. Okay, based on that, we’d give you a loan for this.” But they haven’t looked at anything. Maybe you say you make 100,000, but you only make 50, or maybe you say you make 100, but you have $75,000 in debt. So, they’re not going to be so excited to give you a loan once they dig a little deeper. But a preapproval means they have run your credit. They have looked at your background. They know how much that you have. They know what your income is. They know what your spouse’s income is, if that’s applicable.

They say, “Based on this information, if this doesn’t change, we will give you a loan for up to this.” It is not a guarantee that you will get a loan for up to X. So you do need to realize that you can still not be approved. One of the easiest ways to get your loan not approved is to buy a brand new car right before closing. Buy brand new furniture for your brand new house. Don’t buy anything. From the time you make the offer or right before from the time you talk to the mortgage lender to the time you close on the house. You sign all the paperwork. Do not make a purchase that you do not absolutely need. Yes, you can buy clothes and food and whatever, but you don’t need to buy a brand new wardrobe or take a vacation to Haiti.

Ryan

Yeah, that’s really important to know. Don’t even apply for more credit cards. Don’t mess with your credit.

Mindy

Good point. Yes, don’t touch your credit score, your credit report. No changes whatsoever until you buy the house. After you buy the house, after you get the mortgage, then go out and buy the car if that is something that you need. We’re not even going to get to the whole “you don’t really need that. You could buy a used car for $5,000.”

This is what you need to know about writing an offer.

Ryan

Okay, so, now we’ve got preapproval. We’re at the point that we’re going to write the offer.

Mindy

We’re going to write the offer. So you want to know how much you’re going to write it for based on comps. What similar properties have sold for in the area. This is important too — what they’ve sold for. Not what they’re on the market for. It doesn’t matter how much you list your house for. Houses that are selling for a hundred thousand dollars can still be listed at a million dollars. It doesn’t make them worth a million dollars.

Ryan

Good point.

Mindy

So you only want properties that have sold, closed for whatever the price. You want to look up the comps for that. You’ve decided on the property, the price that you want to write the offer for. You’ve talked to your mortgage broker. You write in … there’s a place in almost every contact to write in. “I want to buy this house. It is contingent upon me getting a loan at 4.5%,” or whatever the going rate is. If you can’t get a loan, accept at 10%. Maybe that’s not acceptable to you, so you can back out of the contract using the mortgage contingency.

A contingency is an out for the buyer. The contract will go through if all of these contingencies are met. So there are typically a home inspection contingency, a mortgage contingency, a home appraisal contingency. Sometimes there’s a home sale or a home close contingency where I’m assuming that they’re buying their first house. So, those last two don’t apply. You need to know what mortgage you’re getting. You write up the price you’re offering. You write up the mortgage information. You definitely want to check the home inspection contingency box because you want to know what you’re getting into in this property.

Make sure you check the home appraisal box because if you don’t, it doesn’t appraise at the price you are offering.

And you want to check the mortgage appraisal or the home appraisal box, because if your home doesn’t appraise, if this home doesn’t appraise at the price that you are offering, the bank will not give you a loan, and therefore, you cannot by the property.

Ryan

Or you’ll have to come up with a difference on the loan. The bank will not actually give you that. They’ll say, “Well, we’ll still give you what we want and what we said in writing here, but you’re going to have to cover up the extra.” And if your house comes in at $400,000 purchase price and the appraisal comes in at 390, guess who’s putting the $10,000. It’s different.

Mindy

You’ve got to bring 10,000 whole dollars to the closing or you can’t buy the house, in addition to the down payment that you’re making, in addition to all of the costs associated with buying a house. And you can ask the seller to reduce the price to the appraisal price. They have the right to do that. They have the right to walk away, and say, “No, thank you.” They have the right to ask you, “No. I’m not going to do that.” You can bring more money to closing or you can walk away.

If you remove your contingencies, your deposit goes hard.

Ryan

And if you remove your contingencies, all of them, then your deposit goes hard, which means that it’s nonrefundable. During all this time, if a contingency for mortgage or appraisal doesn’t go through, they can get their money back.

Mindy

Yes, and we didn’t talk about this yet. This is called earnest money. This is an amount of money that you give to the seller to show your dedication to the sale, because it’s one thing to just put a property under contract and walk away and you don’t have any money at risk. And now, the seller has had their house on the market. It’s been under contract. They haven’t been able to accept any other contracts and now the contract fell through. So it’s not really fair to them. I don’t know when they started the concept of earnest money, but now it is standard in every state to give earnest money, which is around 1% of the purchase price.

You write a check to the title company or the closing attorney or the real estate agent. You do not write a check to the seller themselves because that’s not their money. It’s your money that they’re holding. So after you have met all of your contingencies, you release them, during the course of the contract. Your earnest money goes hard and you cannot get it back. The first contingency that comes up is the home inspection contingency. You want to know the condition of the property before you buy it, so you hire a licensed home inspector. If this is your first property, do not skip this step!

This is so important because if you are buying your first property, you don’t know what a broken foundation looks like. Water spots on the ceiling. You probably know what that is, but do you know how serious that is? Do you know that the pipes work? Do they even have pipes? Copper theft is huge right now. That’s when people come in and steal all the copper pipping in your walls and then you turn on the water and it sprays everywhere or … let’s not even get into that, but you want to know the condition of the home as it is currently right now. A home inspection is a not a guarantee that the house will not have any problems ever, but the home inspector comes in, and they say, “Oh look. That furnace is 12 years old.”

You can ask a seller to remedy existing problems with a home.

A furnace typically goes for 13 to 20 years. So it’s 12 years old. It’s getting up in age but it should be good. It’s in good condition now. The air conditioner is 27 years old, so you’re going to need to replace that soon. You want to know about this so you can either ask the seller to remedy the problem. Ask them to lower the price. Ask them to split the difference. There’s a lot of different ways you can handle that, but you want to know what you’re getting into before you get into it.

Ryan

I wouldn’t skip this step even if it was your 30th purchase.

Mindy

No, I wouldn’t either, but I want to make sure that they know. We’re talking about buying your first house. Do not skip this step. This is going to cost you between $400 and $800 depending on what sort of tests you’re doing. In my state of Colorado, I am responsible as the home owner from the house to the middle of the street for the sewer pipe. I need a sewer inspection. I recommend all my clients get a sewer inspection because that is a $7,000 fix.

Ryan

That’s a big bill.

Mindy

7,000-plus. It’s not always $7,000, but keep that in your head. You didn’t pay $400 or $800 for the home inspection and now you have a $7,000 bill to fix the sewer pipe that you didn’t know was broken. But if you had found it before you bought the house, you could’ve asked the sellers to fix it, or you could’ve split the difference and now you’ve got a $3,500 bill instead of a $7,000 bill. So, you definitely want to know the condition of the home and make sure that you are comfortable buying the home in that condition before you move on.

Ryan

Yeah, and a home inspector is going to basically look through, and let’s just say it’s something with the AC or it doesn’t get cool enough or there could be a whole number of issues. They’re going to tell you to have a licensed, let’s say, electrician, because something doesn’t work, or a plumber to come out because this pipe looks funny to them. They’re going to tell you exactly what it is. They’re not going to guarantee anything that they might’ve missed in the walls. But it’s something to protect you to say, “Someone came in, who’s intelligent and licensed, and said, ‘This needs to be addressed.'” So, that makes sense.

Inspection is not nearly as expensive as buying a house at full price.

Image of home keys and a house indicating you now own the home.

When they say, “Hey, you need to have your AC checked out by an actual licensed AC guy.” That’s going to be another additional cost, but probably going to be worth the money spent to find out if you’re going to have to replace the whole AC.

Mindy

Exactly. And then inspection is not nearly as expensive as not knowing that it needs to be fixed, buying the house at full price, and discovering later there’s a $10,000 bill. I want to go back a minute, and say, “Go to the inspection. Whatever you do, buying the house, you want to attend the inspection and walk around with the inspector and listen to them when they talk. “Oh look. This light switch doesn’t work.” “Oh okay. Is that a big fix?” “Well not really. It’s probably a couple of dollars.” Your home inspector is not going to give you a hard and fast quote on how much it’s going to cost to fix something, but they are familiar enough with construction conceptts that they will know, “Oh that’s a $10 fix,” or, “Oh no. That’s a $10,000 fix.”

You want to ask them when your inspector is there, they are there. They’re in the moment. They’re in the house and they can explain everything. As soon as they walk out the door, they forget your house, because they’re in houses all day every day. They don’t remember about that.

Ryan

20 houses a day.

Mindy

They don’t remember about that light switch that one time three weeks ago. So you want to be there. You want to walk around with them and you want to ask questions until you understand what they’re saying.

Ryan

Amazing, actual advice. That is awesome. So, now, we’ve gone through this and we know that the appraisal’s going to come through the bank. If you’re getting a loan, the bank is going to require it. So we don’t have to go too much in detail with that. So we’ve got the inspection. Let’s say everything looks groovy from there. The appraisals come in. Everything looks legit. Now, we’re getting ready to close. What’s kind of that last, final process there?

You want to talk to your closing company.

Mindy

Your bank has approved your loan and you are closing on Tuesday. You want to schedule closing closer to the beginning of the week than the end of the week. You do not want four o’clock on Friday closing, because what if something happens? Your bank is closed. They’re not going to open up until Monday and you were planning on moving in this whole weekend and now you can’t. So you definitely want to schedule it like the beginning of the week closing. You want to talk to your closing company. In my state, we use title companies to handle the closing. Some states use attorneys.

You want to talk to whoever is performing the closing, and ask them, “Do I send you a wire? Can I bring a cashier’s check? What identification do you want me to bring with me when I come to the closing? What do I need to do? I’ve never done this before. What do I need?” And we haven’t even talked about title insurance yet.

Ryan

No.

Mindy

There’s so many things.

Ryan

There’s so many things involved and that’s one of the reasons why we’re doing this show specifically on buying a first house, because it is something that every physician always asks is, “I’m ready to buy. I want to buy and I have no idea on the process.” So, this is one of the reasons why we go through this whole thing. So let’s just jump real quick back to title insurance and then kind of pick up where we were.

Mindy

Okay. So, title insurance is an insurance policy against past events. Most insurance insures you for against future events like, “Oh I have health insurance because I might get sick. I have title insurance to make sure that nobody who has ever owned the house before is going to come back and tell me that it’s their house. Going to try and take possession of the house, because the deed was misrecorded, or somebody forged their name,” or whatever. You want to ensure that nothing has ever happened to the house. The chain of title is clean. So we’re going to pretend for this discussion because that’s a whole another rabbit hole you can go down.

Call up the title company.

Ryan

Absolutely.

Mindy

Let’s just say the title company comes back great. The title company will send you a policy that says, “Here’s what we’ll cover. Here’s what we’re going to exclude,” and you want to read through that. You’re not going to understand it. Call up the title company. Ask them specifically, “What does this mean? What does this mean? What does this mean?” until you understand it. Don’t feel stupid. I was talking to a title company representative the other day and I said, “Oh I feel like I should know this.” She said, “I had to ask what forms I was sending you. I had to ask somebody else to double-check to make sure what forms I was sending you was correct,” and I’ve been doing this for 20 years.

If you have a question, ask, because I want you to know what you’re getting into. I want you to know what’s being excluded from the title policy, et cetera. Call up the title company when you get that email because it is written in something you will never understand.

Ryan

This is Mindy at BiggerPockets who deals in real estate all day every day. There’s some things that even she doesn’t understand, and when she calls title, that they don’t even understand. So, as a physician, you’re not expected to know all of this stuff, so it’s really important to understand. Ask questions. There’s no such thing as a stupid question.

You need to know how you are getting your down payment funds to the closing company.

Mindy

That is a really, really, really good. Yeah, you’re not expected to understand this so don’t pretend that you do. Just ask the questions. So your title policy came back and now you’re getting ready to close. You want to know how you are getting your down payment funds to the closing company. I had a client. I was helping them buy their house and the title closer called me up, and she said, “I didn’t receive their funds,” and the closing was the next day. I said, “Oh my goodness. The bank is … I’ve worked with this bank a bunch of times. They’re supposed to be really good. Let me call them.”

She said, “No, no. I got their funds. I don’t have the wire from the buyer.” I said, “well, they’re just going to bring a cashier’s check tomorrow.” She said, “No. We don’t accept cashier’s checks over $1,000,” because there’re so much fraud. It’s very easy to forge a cashier’s check. So now we were scrambling and she had actually … This was my mistake. This was 100% my mistake. I didn’t read her instructions because I’ve done this before. Your title company will give you instructions. Read every word. Call them up and ask questions if you don’t understand, because if my buyer was able to get a wire sent out that day … but if she had not been, closing would’ve been postponed.

And you definitely want to double-check your wire instructions. Here’s another fun, little story. My friend Shannon bought a house. She was about ready to close and she finally gets the instructions from the title company. She wakes up the next morning, double-checks her email for some reason and sees another email sent from the title company that says, “Oops. We gave you the wrong number. Sorry. Here’s the real number.” She’s like, “Oh thank God. I saw this. Boy, that would’ve really screwed it up.” Her title company’s email was broken into. They sent her real instructions and then somebody broke into the email account and sent her fake instructions, so her wire didn’t go to the title company. It went to the scammer’s account.

[bctt tweet=”Be sure you are aware of wire transfer fraud. It happens a lot more often than we want to admit.” username=”physicianwealth”]

Ryan

That’s scary.

Mindy

That’s very scary and that is happening more and more and more. I just got notice on the BiggerPockets forum. Somebody posted the California Association of REALTORS now has an advisory that you must sign for every real estate transaction that says, “I am aware of wired transfer fraud. I have double-checked my numbers and I know that that I’m sending it to the right place,” or something like that. I didn’t read it because I’m not in California.

Ryan

So is the best thing to do for them to call title and verify the instructions now?

Mindy

The best thing for you to do is to walk into the title company and get them in your hand and call your bank or walk them over to your bank or whatever. But the second best is to ask them when you first discover what the title company is. Call up the title company with the phone number that you get. Not a phone number that’s been emailed to you from the title company. You go find that phone number and you call them up, and you say, “I need the wire instructions. Please email them to me and then I will call you back to confirm.” You call them back to confirm. You read the numbers. They will confirm them and then you ask them, “Will these numbers change before closing?”

Always double check wire instructions and banking information before making a transfer.

They won’t. Their bank account is the same one they opened up 100 years ago. So these instructions will not change. It doesn’t matter what email you get. Those instructions won’t change. You can lose all your money. My friend Shannon actually got scammed by the dumbest scammer on earth who left the funds in the account long enough that they were seized. Like she had discovered this, so they were seized back from the bank, and it wasn’t pretty.

Ryan

Wow, she got lucky.

Mindy

She got so lucky. That never happens ever. I have to clarify that never will happen again. If you get scammed, you’re [inaudible 00:39:44] out the money, but you definitely want to double-check. And then you call up your bank and you say, “I’m going to email you these instructions and then you need to call me to verify or I will call you to verify.” But you want to verify them over the phone and say, “These will not change. It doesn’t matter what I send you,” because it’s gone in an instant in wire fraud.

Ryan

Yeah, and you’ll be another statistic and you’ll lose a bunch of money and you’re going to have a horrible real estate experience, which no one wants, and there’s so much information and great information and real estate is a really good investment tool for you to use.

Mindy

Yes, it is. Shannon is going to sell this house. There’s a lot of problems with poor Shannon’s story, but she’s so … There’s such a bad taste in her mouth with real estate because of this one transaction. So I feel like this is a really negative part of the story, but it really is.

Please protect yourself from potential scams.

Ryan

It needs to be said, though.

Mindy

It’ll break your heart when you lose $50,000 that you can’t get back and you were saving that for a year or maybe not as a physician.

Ryan

So, now, let’s just get to maybe a little bit more positive here.

Mindy

So you’ve got your wire.

Ryan

Now the wire’s gone.

Mindy

You’ve talked to your title, your closing person. You’ve got all the documents you want. You are going to the closing table. They’ll tell you, “We’re going to close at 9:00,” so you get there at nine o’clock in the morning. You give them your identification so they know that you are the one signing the notes and then you start signing. As the buyer, you sign your name like 11,000 times.

Ryan

Maybe more. Mortgage papers are a huge stack of papers

Mindy

You sign the mortgage papers. You sign the title work. You sign the deed. You sign the promissory note. You sign, you sign, you sign. It’s like an inch thick of papers.

There are a ton of disclosures to sign.

Ryan

At least 100 disclosures of everything.

Mindy

The closing person will describe the document to you. They’ve done this 100,000 times. This is the mortgage document. This is where you say you will pay back the money. So you sign your name and then they show you the next document. This is where you say that this is the actual property. This is you verifying this is your information. This is this and this. This is you saying, “If we made a mistake, you will allow us to fix it and everything will be fine.” You sign your name 11,000 times and then you are done. Now you are homeowner.

Ryan

Now you are a homeowner and that probably is the most painful process other than actually qualifying for the loan and the bank actually verifying everything because they ask…

Mindy

Your hand cramps up.

Ryan

… everything. Yes, your hand will cramp, and it will be long. That closing, signing process does take a while, but it’s well worth it in the end if you have a home that you really enjoy.

Mindy

It really is well worth it. I live in the best house that I’ve ever lived in. I’ve been there four years and my husband will say things like, “Oh well maybe we should think about selling.” I’m like, “No. I’m not moving ever again.” I want to live here.

Right now, it’s difficult for sellers to become buyers.

Ryan

Putting your foot down.

Mindy

I like my house. But one thing we didn’t talk about is occupancy. In this current market, in many of the markets right now are very, very hot. It’s difficult for sellers to become buyers and find another property. It would be difficult for you to find this property. So when you find it, your seller may ask to rent back the property after closing. This is called the post-occupancy closing agreement, and basically, you’re renting the house back to them. They’re going to pay you money every week or month that they’re there, or they don’t need to buy that back. They don’t need to rent it back from you and you take possession at closing, which means they hand you the keys.

They hand you the garage door openers. They hand you … If there’s any codes on like the side of the garage door. You want to know the codes. You want to know everything that you need to get to into the house. And any codes or any locks or any keys or any openers of any kind, you want to get them from them at the closing. You don’t want them to have anything else. Then the first thing you do when you go to your new house is change all the locks and change all the codes…

Ryan

Absolutely. Change everything.

Mindy

… because you never know who you’re buying from and not everybody’s honest, which is bad, but…

Ryan

Very sad.

Mindy

If you’re buying this expensive house, you’re most likely not buying from a scammer, but again, you don’t know who knows that code. They had kids. They tell their neighbors, friend the code. You want to change it so nobody can get into your house.

Ryan

Absolutely.

Ryan

And now it’s time for the Curbside Consult.

Ryan

Just to wrap it up here. At the end of all my shows, I do what’s called a Curbside Consult, which I ask one specific question that’s either written in or something that I’ve been asked a lot.

Mindy

Okay.

Ryan

And so one of the things that I’ve been asked a lot is, if you were to select a cheaper home in a nicer area, when and how much should you do remodel and how much should the rehabs be, if that’s even something you should do?

You want your house to be on par with the rest of the neighborhood.

Mindy

If you have a house, let’s go back to our $300,000 priced house in a $400,000 neighborhood, you want that house to be on par with the rest of the neighborhood. So if everybody in the neighborhood has granite countertops and stainless steel appliances and a jacuzzi in the backyard, and your house has laminated countertops and white appliances and no jacuzzi, you want to bring it up to the same level. It is going to get you more … It’s called forced appreciation. You are forcing the price to go up when you make it on par with the rest of the neighborhood. And maybe it’s not a $400,000 house, maybe it’s only a $375,000 house.

But granite countertops aren’t that expensive $5,000 or $10,000. New appliances, $5,000. There, you just put, let’s say, $15,000 in and now your house is worth $75,000 more or $50,000 more.

Ryan

That’s a nice multiple.

Mindy

It’s a nice multiple, and you want to do things that are on par with the neighborhood. Not things that are weird. So, if the entire neighborhood has laminated countertops, having granite countertops can be nice but you can’t expect people to pay for that when nobody else in the neighborhood … that’s not your competition.

Ryan

So you’re talking about over-improving?

Mindy

Yes. You do not want to over-improve a house. But again, if you buy the $300,000 house in the $400,000 neighborhood, it’s going to be difficult to over-improve.

Ryan

Yeah, it would cost a lot of money to over-improve that, but yeah.

Mindy

It would cost a lot, but it would also be very difficult because you’ve got that $100,000 gap to move in.

You can find Mindy on BiggerPockets.com.

Ryan

Absolutely. Well, thank you so much for being on the show. How can people find out more about you and figure out what you’re doing and keep up with you?

Mindy

I am the community manager at biggerpockets.com, so I am all over the website. I am on their YouTube channel at youtube.com/biggerpockets. I am on @BiggerPockets on Twitter.

Facebook.com/biggerpockets. Or on the site, biggerpockets.com. We have a forum, a blog, and a podcast where we talk about real estate and real estate investing. We teach you the right way to do it. We’ve already gone to the School of Hard Knocks. You don’t need to go there too. You can just learn from our mistakes.

Ryan

It’s an amazing place. It’s where I get a lot of information and get to kind of geek out over real estate. So I definitely suggest you guys head there to biggerpockets.com. And thank you, Mindy, so much for being here, and for FinCon for letting me record at the booth.

Mindy

Thank you very much for having me, Ryan. And I will see you at FinCon.

Ryan

Wow. That was a fun episode. I had so much fun recording and talking with Mindy on that. Real estate’s a secret passion of mine and all I know that I have bought and sold a few houses here and there and I know that Mindy has obviously done the same as she’s an expert at it. I really hope that those of you listening that have never bought a home now have some more insight and are more educated in what’s coming up when you do decide to purchase your first home. It really isn’t that scary, but there are a lot of things that go into it.

I hope that listening to this conversation really sheds some insights for you and really helps you become familiar or a little bit, at least a little more familiar with the process of what it’s like to buy your first home. So, thank you again for listening. The next couple weeks are going to be extremely exciting. This is launch week of the Financial Residency podcast, but upcoming we’ve got really killer shows. We’re going to be talking about Travis Hornsby from studentloanplanner.com. And we’re going to be talking with Passive Income MD from passiveincomemd.com as well Bo from Future Proof MD.

So I really think you guys are going to get a lot out of the upcoming episodes. I hope you got a lot out of this episode. Thank you so much for joining me in launch week of Financial Residency. Talk to you soon.

Ryan

Thank you for listening to the Financial Residency podcast. This episode has ended, but your financial residency continues online. Head over to financialresidency.com where you’ll find links to any resources mentioned in today’s episode along with other valuable tips and information that will help you regain your financial freedom. That’s financialresidency.com.

 

 

Ryan Inman